It is your (and bilby's) insistence that government spending is fundamentally different from private spending that shows ignorance, and leads to confusion.
The difference is in the sequencing; If I want an automobile, then before I can buy one, I must obtain the money from someone else. I can earn it, borrow it, or even steal it; But I cannot buy anything until I obtain it.
Currency issuing governments do things the exact opposite way. First they buy stuff; Then, if they want to reduce the inflationary effect of their purchasing, they might decide to get money from someone else to offset that.
If you don't think that this is a fundamental difference, then you don't think.
Your claim that the U.S. government creates money by spending is confused. You are ignoring two facts: (1) government spending is essentially the same as private spending; (2) there are at least two DIFFERENT types of fiat money.
(1) Government spending and private spending.
. (A) Cash
. . (i) Government taxes George Roe $1000 and buys a statue of a frog with the proceeds, decorating some bureaucrat's office.
. . (ii) Government does NOT tax George Roe. With the extra $1000, George buys the same statue himself and decorates his living room.
Same-same.
. (B) Borrowing
. . (i) Government sells a bond (goes into debt) to raise $1000; then buys the statue.
. . (ii) George Roe buys the statue putting it on his credit card.
Same-same. Some borrowers have better credit ratings than others. So what?
(2) Fiat Money
The United States has issued various sorts of paper money over the years: United States Notes, Silver Certificates, etc. Lincoln's "greenbacks" were
promises to pay gold at some undisclosed future date. This paper traded at a very big discount to its putative value in gold. Bank of America issues traveler's checks: promises to redeem in legal tender. These trade at 100 cents on the dollar. (At banks in foreign countries, you get a slightly better rate on a traveler's check than actual Benjamins!) WHICH is the "fiat money"? A distrusted promise to pay in gold, or a trusted promise to redeem in sound central-bank currency?
But never mind. For over 50 years, the United States has NOT issued United States Notes, NOR Silver certificates, etc. All paper currency issued in the United States for fifty years has been "Federal Reserve Notes." (We will ignore coins and postage stamps. OK?)
Obviously most money these days is electronic; there's no need for paper Benjamins. This electronic money is created by banks, both private banks and the FRB (but NOT the U.S. Treasury). The electronic money created by the FRB has essentially the exact same status as the physical Benjamins it issues.
Federal Reserve Notes are issued BY the individual Federal Reserve Banks, and are backed 100% by assets of the Federal Reserve Banks. Government agencies pay for their purchases using checking accounts. These accounts do NOT have overdraft protection.. If the agency needs physical Benjamins, it does what any bank customer would do: It cashes a check at a bank branch. Clear?
The relationship between the US Government and the FR Banks may be confusing. The FR Banks are nominally owned by its Member (private) banks; the 12 Bank Governors are elected by private banks. But the U.S. President appoints a majority of the two governing committees; and Congress imposes rules. After paying members their statutory dividends, any excess profit made by FRB is paid into the U.S. Treasury. Despite these facts, the FRB's mechanisms are those of a private bank operating independent of government. This may change at some FUTURE date due to politics, crime or corruption, but for over a hundred years this is how FRB has operated.
Some countries' governments have a form of Fiat Money where they just print whatever they need. That is NOT how Federal Reserve Notes work. Clear?
Thanks for your kind attention. I hope you learned something.
